In part one of this series, I summarized the two types of insurances that most people are familiar with. The other two that you are likely to run in to when you purchase a home are mortgage insurance and title insurance. In many cases, both are required and they are typically set up on your behalf.
Mortgage insurance (MI) is a misunderstood insurance with a bad reputation. No one wants to pay more for something and surely no one wants to pay for insurance that seemingly only benefits and protects the lender; but, MI provides a HUGE benefit to you: if it wasn’t for this insurance, mortgage companies could not risk providing loans to people with less than 20 percent down.
That is the purpose of MI in a nutshell. Mortgage Insurance companies provide lenders with a means to reduce risk. In effect, the MI companies are betting that you will pay your mortgage every month as agreed. Just about every loan with a loan-to-value (LTV) over 80 percent has mortgage insurance in some form. It may be paid in the form of an upfront payment that can be financed in the loan, in monthly installments collected with the rest of your mortgage payment, or a combination of both. Sometimes it is even paid through a higher interest rate rather than a separate payment.
This type of insurance is the one people are usually least familiar with. There are two types of title policies: the owner’s policy and the lender’s policy. Both protect against defects, liens, and encumbrances that would make it unmarketable. In other words, it protects against someone else claiming ownership of the property or that they have a previous lien against the property that must be satisfied.
A lender’s title policy will be required. An owner’s policy is optional, but recommended. Premiums for the policies are paid at the time of settlement for the life of the policy, which remains in place for as long as you own an interest in the insured property. The policies are often set up by the attorney or settlement agent that coordinates and executes the settlement. You are permitted to shop for title insurance, though you will want to do so well before your settlement date to ensure that everything is in place and no delays occur.
I know we began with the expectation to cover four types of insurance you will run in to when you buy a home, but I would be remiss if I didn’t mention a couple of others that come up from time-to-time. Moving insurance and mortgage protection life insurance are not involved in the transaction itself, but some new homeowners do ask about them.
Moving insurance is not a bad idea if you are using a moving company. Basic coverage generally will not come anywhere near replacing the more valuable items you own. Federally-mandated moving coverage only requires reimbursement of $0.60 per pound of an item. A mid-sized flat-screen TV weighs less than 50 pounds. Would $30 replace it? The best place to start for extended moving insurance may not be the moving company, either. Begin your search with your current insurer and compare their coverage, payment, and claim process to that offered by the moving company.
As a new homeowner, it is likely you will receive stacks of mortgage protection life insurance offers stuffed in their mailboxes after you purchase your home. As it sounds, it is basically a life insurance policy that promises to pay the mortgage if you die. Again, you should do your own homework, but you will often get better protection, and more per premium dollar, with a term life insurance policy.
As always, if you have any additional questions about these or any other home-buying-related topics, feel free to contact me. My goal is to provide you with the information you need to make the best decisions for you and your financial future.